Earning assets: What do trends indicate?



Large banks have a lower percentage of earning assets

If we segregate banks according to their asset size, some very interesting trends emerge in terms of the percentage of earning assets. The first important trend is that larger banks tend to have lower earning assets.

There are four banks with asset sizes greater than $1 trillion. These banks are Wells Fargo (WFC), JP Morgan (JPM), Citibank, and Bank of America (BAC). These banks have nearly 87.6% earning assets.

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There are 18 banks with asset books between $100 billion to $999 billion. These banks include some big names like US Bank (USB), Capital One, and PNC Bank. These banks have nearly 88.8% earning assets. Even smaller banks with asset books between $50 billion to $99 billion have nearly 90.7% earning assets.

Very small banks with asset books between $500 million to $999 million come out the best in terms of earning assets. Such small banks are often concentrated in one state or a metropolitan area or across a few towns. These banks have earning assets of nearly 92.75%. Banks smaller than this show a declining percentage of earning assets. Below this asset threshold, banking tends to get more difficult. Such small banks often aren’t featured in a broad ETF like the Financial Select Sector SPDR (XLF).

Why large banks have a smaller percentage of earning assets

There are two reasons why larger banks have a smaller percentage of earnings assets. First, larger banks have larger capital requirements. These requirements have been enforced even more strictly in the Basel III norms. The banking regulator, the Federal Reserve, also doesn’t want some banks to become “too big to fail.”

The second reason is that larger banks tend to have a few branches or revenue streams that are below optimal when compared to the bank’s average. Smaller banks on the other hand benefit from focusing only in the geographic areas and products they are strong in.


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